Bank of Canada raises interest rate to 1.5 percent

The cost of borrowing is set to go up for the fourth time in just over a year.

by Vanmala Subramaniam
Jul 11 2018, 2:33pm

Canadian Press Images

The Bank of Canada has raised interest rates for the fourth time in just over a year, pushing the overall cost of borrowing even higher and placing further strain on mortgage holders across the country.

The central bank’s target overnight rate — what financial institutions charge each other for same-day loans — rose to 1.5 percent, from the 1.25 percent figure it has been since mid-January. Since July 2017, interest rates have gone up a full one percent, fueled by consistent economic growth and gains to employment.

Western economies like Canada, the U.S. and the UK have relied on a low interest rate environment since the 2009 financial crisis in order to boost corporate and consumer spending. One of the major side effects of historically low interest rates in Canada at least, has been a booming real estate market — home prices dramatically soared in most major Canadian cities between 2009 and 2017 as people were incentivized to borrow because of low mortgage rates.

“We need to wean ourselves off of those super-low interest rates and toward the more normal interest rate environment,” Frances Donald, senior economist with Manulife Asset Management told CBC News. “That’s not a comfortable transition for any economy, but for ou longer-run economic health, it’s necessary.”

Indeed, every Bank of Canada interest rate hike has been accompanied by a subsequent rise to mortgage rates, putting the pinch on Canadians who have, in many cases, overextended themselves mortgage-wise. A survey conducted this week by financial advisory firm MNP found that an alarming number of respondents — 28 percent — said that an interest rate increase to 1.5 percent would propel them towards bankruptcy. In fact, 42 percent of respondents said that if rates rise much more that would “fear” for their financial well-being.

Although this round of rate hikes was widely predicted, some analysts pointed towards uncertainty around Canada’s trade relationship with the Trump administration as a reason to keep interest rates unchanged. But a statement put out by the central bank today dismissed those concerns, citing an economy that is “running close to capacity despite growing trade frictions.”

Most major banks are expected to announce mortgage rate hikes in the coming week.

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